Recent regulatory developments of interest to financial institutions and markets.

Contents

• COVID-19: FCA updates statement on short selling bans and reporting
• COVID-19: ESMA clarifies best execution reports under MiFID II RTS 27 and RTS 28
• Credit rating information and data: ESMA call for evidence
• MiFID II review: ESMA report on position limits and position management
• MiFID II: ESMA confirms application date of equity transparency calculations
• MiFID II: ESMA technical advice on impact of inducements and costs and charges disclosure requirements
• MiFID II: ESMA final report on weekly position reports
• EMIR: ESMA final report on procedural rules for penalties imposed on third-country CCPs, TRs and CRAs
• EMIR 2.2: ESMA final draft RTS for CCP colleges
• EMIR: ESMA consults on clearing solutions for pension scheme arrangements
• ESMA updates public statement of consultation practices

COVID-19: FCA updates statement on short selling bans and reporting

On 31 March 2020, the UK Financial Conduct Authority (FCA) updated its webpage on short selling bans and reporting to confirm that the required changes have now been made to its systems to facilitate the change to the notification threshold for notifying net short positions under the Short Selling Regulation from 0.2% of issued share capital to 0.1%.

The FCA will be ready to receive notifications at the lower threshold from 6 April 2020. Firms are not required to amend and resubmit notifications submitted to it between 16 March 2020 and 3 April 2020.

Firms should make best efforts to report at the lower threshold from 6 April 2020. However, the FCA appreciates that it may not be possible for some firms to amend their systems by this date. If this is the case, they should contact PMU@fca.org.uk to discuss the issue further with the FCA.

COVID-19: ESMA clarifies best execution reports under MiFID II RTS 27 and RTS 28

On 31 March 2020, the European Securities and Markets Agency (ESMA) published a public statement clarifying issues relating to the rules under the MiFID II Directive on publication of general best execution reports by execution venues and firms. The statement specifically relates to the requirements under Delegated Regulation (EU) 2017/575 (RTS 27) and Delegated Regulation (EU) 2017/576 (RTS 28).

ESMA and competent authorities are aware of difficulties encountered by execution venues and firms in preparing best execution reports due to COVID-19. ESMA is issuing this public statement to promote coordinated action by national competent authorities (NCAs) and to provide clarity to execution venues and firms.

It explains that execution venues are due to publish their next general best execution reports on 31 March 2020 in respect of RTS 27 reports on the quarterly information for the reporting period from 1 October to 31 December 2019. For firms, the next deadline is 30 April 2020 for RTS 28 reports on the annual information for the reporting period of 2019.

ESMA recognises that execution venues and firms may need to deprioritise efforts for the publication of these general reports concerning 2019 and recommends that NCAs take into account these circumstances by considering the possibility that:

• later than the following reporting deadline (i.e. 30 June 2020); and
• firms may only be able to publish the RTS 28 reports due by 30 April 2020 on or before 30 June 2020.

Considering the exceptional circumstances, ESMA encourages NCAs not to prioritise supervisory action against execution venues and firms in respect of the deadlines of the general best execution reports for the periods referred to above. Furthermore, ESMA encourages NCAs to generally apply a risk-based approach in the exercise of supervisory powers in their day-to-day enforcement of RTS 27 and 28 concerning these deadlines.

ESMA recommends that firms and execution venues keep records of the internal decisions taken in relation to the expected delay.

ESMA reminds firms of their core obligations to achieve best execution for clients and to ensure fair order handling and allocations during current market volatility.

Credit rating information and data: ESMA call for evidence

ESMA has published a call for evidence on the availability and use of credit rating information and data. In particular, ESMA seeks the views of users (and potential users) and distributors of credit ratings, and credit rating agencies (CRAs).

ESMA aims to map the principal activities (regulatory and otherwise) undertaken by various types of users in which credit ratings are required as an input. For each activity (e.g. risk management, market research, regulatory reporting), ESMA aims to identify users' specific rating data needs (e.g. format, frequency, scope, downloadability, etc.) and how these needs correspond with the information currently provided on the European Rating Platform (ERP) and on CRAs' public websites. ESMA aims to assess whether there may be scope to improve the usability of information published on the ERP and CRAs' websites and what the likely costs and benefits might be to users and CRAs of implementing such improvements.

Comments can be made on the call for evidence until 3 August 2020.

MiFID II review: ESMA report on position limits and position management

ESMA has published a review report on the impact of the application of position limits and position management provisions on commodity derivatives markets.

ESMA gives a summary of the position limit regime under MiFID II and assesses the application of position limits on market abuse, orderly pricing and settlement conditions. It also provides an assessment of the impact of position limits on the liquidity of commodity derivatives markets.

ESMA provides proposals for amending the MiFID II Directive to improve the efficiency of the position limit regime.

MiFID II: ESMA confirms application date of equity transparency calculations

ESMA has confirmed that, despite COVID-19, its 1 April 2020 date for the application of transparency calculations for equity instruments is unchanged.

The calculations are required under the MiFID II Directive and the Markets in Financial Instruments Regulation. ESMA has recently been asked by some stakeholders to postpone the date of application in the light of the COVID-19 pandemic.

ESMA states that, in this specific instance, adapting to new transparency results for equity instruments is a process that market participants have performed several times in the past and should not require new IT releases. Having consulted with various market participants, ESMA considers that delaying the application of the new transparency results would in itself entail some risks, and might even create additional operational burdens to all the market participants that have already planned for them.

MiFID II: ESMA technical advice on impact of inducements and costs and charges disclosure requirements

ESMA has published a final report to the European Commission setting out its technical advice on the impact of inducements and costs and charges disclosure requirements under the MiFID II Directive.

In the advice, ESMA encourages the Commission to conduct further analysis on the topic of inducements and proposes some changes to the regime mainly aimed at improving the clients' understanding of inducements.

In relation to costs and charges disclosure, ESMA finds that the MiFID II disclosure regime generally works well and that it helps investors make informed investment decisions. However, ESMA advises that some disclosure obligations vis-à-vis eligible counterparties and professional investors are scaled back.

Other elements of the report relate to trading by telephone, the provision of information to clients in a durable medium and to the possibility to create new categories of clients.

MiFID II: ESMA final report on weekly position reports

Following consultation, ESMA has submitted a final report giving revised technical advice to the Commission on weekly position reports required under Article 58 of the MiFID II Directive.

ESMA consulted on its proposals to introduce a new threshold for the size of open positions triggering the publication of weekly position reports in its November 2019 consultation. The final report summarises the feedback received and ESMA's response to it, as well as the final technical advice.

EMIR: ESMA final report on procedural rules for penalties imposed on third-country CCPs, TRs and CRAs

ESMA has published a final report setting out technical advice to the European Commission on draft procedural rules to impose penalties on third-country central counterparties (TC-CCPs), trade repositories (TRs) and credit rating agencies (CRAs) under the European Markets Infrastructure Regulation (EMIR). In the final report, ESMA also assesses the feedback received to its December 2019 consultation paper and responds to it.

ESMA includes proposals to amend the current procedural rules applicable to imposing penalties on CRAs, to align them and make them consistent with the proposed procedural rules applicable to TC-CCPs and TRs.

ESMA has advised only on the procedural aspects, and has not carried out a cost-benefit analysis. It understands that, as part of the approval of EMIR (as amended), impact assessments of the different policy choices have already been carried out.

EMIR 2.2: ESMA final draft RTS for CCP colleges

ESMA has published a final report containing draft regulatory technical standards (RTS) for CCP colleges under EMIR 2.2. The draft RTS proposals amend Commission Delegated Regulation (EU) No 876/2013 (RTS on colleges for CCPs) and reflect the changes to Article 18(6) of EMIR introduced by EMIR 2.2, which entered into force on 1 January 2020.

ESMA will submit the final draft RTS to the European Commission for endorsement in the form of a Commission Delegated Regulation. Following endorsement, they will then be subject to non-objection by the European Parliament and the Council of the EU.

EMIR: ESMA consults on clearing solutions for pension scheme arrangements

ESMA has published its first report for consultation on clearing solutions for pension scheme arrangements (PSAs) under EMIR.

One of the amendments to EMIR under the EMIR Refit Regulation was a further extension of the exemption from the clearing obligation for PSAs. The extension was introduced because of the challenges that PSAs would face to provide cash for the variation margin calls related to their cleared derivative contracts.

This consultation report is the first step in ESMA fulfilling its obligation under the EMIR Refit Regulation to provide a report to the European Commission (in cooperation with the EBA, EIOPA and the European Systemic Risk Board (ESRB)), documenting the progress made towards clearing solutions for PSAs. This will assist the Commission in its obligation to prepare a report assessing whether viable technical solutions have been developed for the transfer by PSAs of cash and non-cash collateral as variation margins and the need for any measures to facilitate those viable technical solutions.

ESMA notes that the document only constitutes a preliminary report on which it is publicly consulting, in order to provide for its second more comprehensive report to the Commission, which is due by December 2020. The paper sets out the issues PSAs face in clearing their contracts, considers the rationale for PSAs' use of derivatives and explores the different solutions already under consideration to help PSAs to centrally clear their OTC trades.

ESMA seeks feedback on:

• the structure of PSAs' portfolios and the potential reduction of investment returns from increasing their cash holdings; and
• the solutions being explored, such as relying on the ancillary services of collateral transformation of clearing members, a market-based repo solution or the access to alternative emergency liquidity arrangements.

The consultation closes on 15 June 2020.

ESMA updates public statement of consultation practices

ESMA has published an updated version of its public statement of consultation practices to take into account the amendments to the ESMA Regulation as a result of the review by the European Supervisory Authorities.

The statement summarises ESMA's consultation practices, most of which were already in place before the amendment of the ESMA Regulation.

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